By David Brandolph
I expect a 401(k)-type plan customer service call center to be a place to get impartial information about the plan and one’s account. But a recent experience with a center representative has made me question the impartiality of anyone—including such a representative–who recommends transferring plan assets to an IRA, particularly if that person or their employer stands to gain financially.
My encounter taught me that, due to the potential for getting conflicted advice on transfers, people who are considering such action must carefully evaluate their plan and their unique needs.
As I had left the employer that sponsored my plan, I was eligible to transfer my plan assets to an IRA. Members of 401(k) plans typically become eligible to withdraw plan assets when they leave an employer, reach age 59 and one-half or when otherwise permitted by the plan.
On the day in question, I called the plan’s customer service telephone line to ask about the interest rate being paid by the plan’s low-risk option—an insurance company provided stable value fund. After giving me the fund’s rate, the plan’s representative pointed out that if I transferred my plan assets to an IRA sponsored by the representative’s firm, I could earn an even higher return by investing in an FDIC-insured bank certificate of deposit (CD) offered in the IRA but not my plan.
He told me that his firm could provide ongoing investment advice following the transfer, but he didn’t say if or how much I would be charged for such advice.
Hearing this from the representative was a big surprise, particularly since I never asked for such advice, nor did I say I was considering a transfer. Given that the representative was offering ongoing investment advice to be furnished from his company after the suggested transfer—from the same company that was providing record-keeping and possibly other services to my plan—I suspected that he may have had a conflict of interest in dispensing such advice.
Federal law requires plan administrators, trustees and other so-called fiduciaries to act solely in the interest of plan participants and beneficiaries when performing their duties under the plan. So, it’s possible that, if the representative or his firm stood to gain financially from his unsolicited advice to me, and if his firm was found to be acting as a “fiduciary” under the law, his recommendation could have violated that law.
Putting aside the potential legal violation question, what’s clear from my interaction with the representative was that I shouldn’t rely on his advice (or really anyone’s advice) without obtaining and carefully evaluating additional information about my plan and my needs under it.
Admittedly, I knew something that many people don’t–that the best strategy for most plan members is to keep their money in the plan.
First, plans usually offer mutual fund investment menu choices that are lower in fees than IRA selections. This is particularly true for large plans. According to a 2022 study by The Pew Charitable Trust, the median expense ratio for institutional mutual fund shares (usually offered in employer-sponsored plans) was 37 percent in aggregate lower than those for retail shares (offered by IRA custodians) for stock, bond and hybrid funds—those investing in a mix of stocks and bonds.
I also knew that plan administrators and trustees are legally required to provide plan members with a diversified menu of investment choices and to monitor the performance of those investments. IRA custodians don’t have to do that and rarely—if ever—do.
Transferring plan assets can make sense in some situations, such as to consolidate plan assets in one place, to convert assets to a Roth IRA, or if a plan’s fees are high and/or plan choices insufficient.
How does your plan stack up? Here are some, but by no means all, of the questions you need answered (from your plan, advisor or online):
I’m staying with my plan. It has low-cost institutional funds, low-risk options with reasonable returns and offers investment diversification.
What’s the right decision for you? Staying put in one’s plan is generally the right choice for most people, but carefully evaluating your individual plan and your unique needs will help you know for sure.